Low Appraisal, Restructured LTV, and Disclosures Wanted "At the Closing Table"
Priya is pre-approved for a $412,000 purchase with 10% down. The loan is $370,800 at 6.5% on a 30-year fixed with 1 point ($3,708) origination plus third-party fees, and the initial Loan Estimate was issued March 3. Her contract closing date is Thursday, April 24. The appraisal ordered April 1 comes back at $389,000, so the lender will only lend 90% of value, $350,100, unless Priya brings additional cash. She chooses to restructure to 90% loan-to-value on the appraised value and add $1,400 in discount points to hold her payment near the original quote, which moves the APR from 6.72% to 7.55%. The average prime offer rate for a comparable transaction that week is 6.00%. Her realtor wants the revised disclosures handled at the closing table so the April 24 date does not slip.
1. When must the revised Loan Estimate be in Priya's hands, and what happens if the lender waits until closing?
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A low appraised value that changes the loan amount is a valid changed circumstance, so revised disclosures are permitted. Two timing rules then apply, and both are deadlines, not suggestions.
First, the revised Loan Estimate must be delivered or placed in the mail no later than three business days after the lender receives the information that created the changed circumstance. In practice that means the appraisal review date starts the clock.
Second, and more important here, the consumer must receive the revised Loan Estimate no later than four business days before consummation. Counting backward from Thursday April 24 under the calendar-day definition (all days except Sundays and federal holidays), the last permissible day is Saturday April 19; prudent lenders deliver by Friday April 18. Handing it over at the closing table on April 24 is four business days too late.
If the disclosure is late, the revised numbers do not count for tolerance purposes. The lender is stuck comparing final charges to the last timely-disclosed Loan Estimate, and any increase in a zero-tolerance charge - the origination charge and discount points both live there - becomes a violation that must be cured by refunding the excess to Priya, with the cure typically due within 60 days of consummation. The realtor's convenience does not extend a regulatory deadline; the closing date should move instead.
2. Is the restructured loan a higher-priced mortgage loan at 7.55% APR, and what obligations follow if it is?
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Yes. For a first lien, the higher-priced mortgage loan threshold is an APR that exceeds the average prime offer rate by 1.5 percentage points or more. 7.55% − 6.00% = 1.55 points, which crosses the line. Note what pushed it over: the discount points Priya added to keep her payment steady are included in the APR calculation. A borrower trying to preserve affordability can accidentally trigger an entirely different compliance regime, so the threshold needs to be tested on the restructured terms, not the original quote.
Consequences:
- Escrow. An escrow account for taxes and insurance must be established, and it generally may not be canceled for at least five years.
- Appraisal rules under 12 CFR 1026.35(c). A licensed or certified appraiser must perform a physical interior inspection, the lender must give Priya a free copy of the written appraisal at least three days before consummation, and appraiser coercion is prohibited. Because the property was purchased and is being resold within a short window, be alert for the second-appraisal requirement if the price jumped sharply.
- Ability to repay. The loan is fully covered by the repayment rules, so income verification standards tighten.
The compliance-safe course is to disclose the escrow requirement and deliver the appraisal promptly, before anyone counts down to April 24.
3. Priya's restructured loan shows a $1,400 increase in discount points. What is needed for that increase to avoid a tolerance violation, and how would you cure it if the disclosure was late?
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Discount points and the lender's origination charge are zero-tolerance items: they may not increase above the amount disclosed on the last timely Loan Estimate unless a valid changed circumstance applies, the revised disclosure is issued within three business days of receiving the new information, and the consumer receives it at least four business days before consummation.
The argument for revising here is that the appraisal result is a changed circumstance that reset the loan amount and terms, so the revised points can be disclosed on a new Loan Estimate. The weakness is causation: Priya's choice to buy the rate down is a borrower election, not a cost imposed by the appraisal. The defensible position is that the appraisal changed the transaction structure and the new points are part of a re-quoted loan; the indefensible position is disclosing them at closing and hoping nobody compares the two estimates.
If the revised Loan Estimate was not timely, the lender must cure. Compare final charges to the last timely-disclosed estimate, calculate the excess on zero-tolerance items (the 1 point origination plus the $1,400 of points), and refund it to Priya within 60 days of consummation, with a corrected Closing Disclosure. Because points scale with loan amount, note that the loan amount actually fell from $370,800 to $350,100, so the origination charge in dollars should have decreased; the lender cannot use the restructure to quietly raise the dollar cost. Document the changed-circumstance analysis in the file either way - the exam question and the examiner question are the same question.